Australian Securities and Investment Commission (ASIC) v Golden Financial Group Pty Ltd (No 2) [2017] FCA 1267

After much anticipation and for the first time, the best interest and appropriate advice duties under the new Part 7.7A of the Corporations Act 2001 (Cth) (Act) have been substantially considered. In ASIC v NSG Services Pty Ltd [2017] FCA 345 (first NSG decision), the Federal Court of Australia found a financial services licensee liable for contraventions of the newly included provisions of the Act by its authorised representatives and its employee advisers (as a consequence of the new deeming provisions of the Act). The Court went on to impose civil penalties against the financial services licensee totalling $1 million in the related decision of ASIC v Golden Financial Group Pty Ltd (No 2) [2017] FCA 1267 (second NSG decision).

The two decisions give support to the intended purpose of the new Part 7.7A of the Act, which was to provide retail clients with higher levels of consumer protection and by placing obligations directly on individual advisers (rather than just on the authorised representatives and financial services licensees), providing a clear standard for the providers of the advice to meet. The significant penalties that were imposed by the Court serve a serious warning to financial services licensees about the need to maintain proper control over their advisers and to have in place systems and procedures that focus on issues of compliance and not just sales.

The first and second NSG decisions

In the first NSG decision, ASIC had claimed declaratory and other relief against the financial services licensee, NSG Services Pty Ltd (NSG), for alleged contraventions of the best interest and appropriate advice duties and the deeming and reasonable steps obligations under Part 7.7A of the Act.

The facts in the case had been agreed by the parties before the hearing. During the period between 1 July 2013 and 20 August 2015, five of NSG’s representatives (two employees and three authorised representatives) provided advice to a number of retail clients in relation to life risk insurance and superannuation products.

At the licensee level, there were a number of deficiencies that had contributed to the provision of inappropriate advice, including:

  • a new client advice process that focused on speed, rather than accuracy, and limited clients’ abilities to reflect on advice before recommendations were implemented
  • training of representatives that focused on client communication and sales effectiveness, rather than obligations under the Act
  • a lack of regular or substantive performance reviews of representatives (e.g. there were internal and external audits carried out that identified deficiencies, but NSG failed to take any responsive steps to address them)
  • a remuneration model based on commissions that created a culture of sales over compliance.

The Court found that this led to a number of inappropriate practices at the adviser level, including the recommendation of unnecessary or inappropriate products and advisers completing application forms and retrospectively witnessing documents (amongst others).

It was perhaps unsurprising then that the parties had reached agreement on liability prior to the hearing, including that NSG had contravened:

  1. section 961K(2) of the Act, where a financial services licensee is deemed to have contravened the section if a representative, other than an authorised representative, of the licensee contravenes, amongst other things, the best interest and appropriate advice duties (found in sections 961B and 961G of the Act respectively); and
  2. section 961L of the Act, where a financial services licensee is required to take reasonable steps to ensure that their representatives of the licensee comply with the best interest and appropriate advice duties (amongst others).

The Court was satisfied that the agreed facts and admissions provided a sound and proper basis for granting the relief and a total 20 declarations were made against NSG.

The second NSG decision was intended to deal with the question of pecuniary penalties pursuant to section 1317G(1E) of the Act, and costs. Prior to hearing, the parties had agreed to an order requiring NSG to pay a pecuniary penalty to the Commonwealth in the amount of $1 million in respect of the contraventions. Having considered the principles applicable to the exercise of discretion in imposing pecuniary penalties and noting that their primary purpose is to promote the public interest in compliance, the Court made the order proposed by the parties (with $250,000 and $750,000 respectively apportioned for contraventions of the deeming and reasonable steps obligations). The Court noted the seriousness of the contraventions and also took into account the circumstances of the claim, which included that there was no dishonest conduct and that NSG had generally cooperated with ASIC in admitting the contraventions and agreeing to orders.

Conclusion

In this case, there were clear (and admitted) contraventions of the relevant sections of the Act, which limited the Court’s need to consider the intricacies of the new sections. However, the parties were not in agreement on all issues, including, for example, whether, for the purpose of section 961L of the Act, it was necessary to show that there were contraventions of other sections (like the best interest duty) or whether the section only required consideration of the financial services licensee’s conduct. It was unnecessary for the Court to determine this issue, given the facts.

It is apparent that these two decisions are just the starting point for the consideration of the new Part 7.7A of the Act, and it is only a matter of time before these and other issues arising out of the Part will be contested before the courts. However, for the time being, financial services licensees should take note that serious consequences can flow from contraventions of the new duties in the Act.